6/25/2010 @ 1:00PM

Court Rules On 'Honest Services' Fraud

Rarely do U.S. Supreme Court Justices Ginsburg on the left and Scalia and Thomas on the right agree on anything, but on Thursday they did. Both agreed with all the other justices that §1346, a federal criminal statute making it a fraud to “deprive another of the intangible right of honest services,” is unconstitutionally vague. But Ginsburg persuaded her colleagues that the statute would pass constitutional muster if limited to situations involving bribery or kickbacks. Prosecutors in official corruption cases often use the statute, and the decision raised questions about the convictions of Conrad Black, a newspaper mogul found guilty of defrauding his own company, and Joseph L. Bruno, a leading New York state politician, recently found guilty of corruption.

Scalia, joined by Justices Thomas and Kennedy, bristled at Ginsburg’s reading the bribery or kickbacks element into the law since it appears nowhere in the statutory language. The three justices would have invalidated the law entirely. Stopping short of calling the decision a piece of judicial legislation, Scalia saw no precedent for the bribery and corruption carve-out, declaring that “This is a dish the Court has cooked up all on its own.”

The case, which has been characterized in the press as a “major blow” to a criminal statute that has become the darling of the prosecutor’s nursery, involved Jeffrey Skilling, who served as Enron’s chief executive officer for seven scandalous months in 2001 prior to its infamous bankruptcy. The indictment accused Skilling of participating in a scheme to deceive investors about Enron’s true financial position. In so doing, the indictment charged, Skilling deprived Enron and its shareholders of their intangible right to his “honest services.”

Since there was nothing in the record about bribery or kickbacks, the Court remanded Skilling’s conviction on 19 counts of fraud and conspiracy to the lower court for reconsideration in light of its opinion. It affirmed his conviction, by a six to three vote, on the issue of whether Skilling’s Texas trial was tainted by pre-trial publicity and community prejudice

Honest services fraud evolved from a 1941 Supreme Court decision in which a public official received bribes in exchange for favorable action on a city contract. The Court reasoned that, even though the city saved money on the deal, the element of bribery made the conduct “a scheme to defraud the public.” Normally, in fraud, there is certain symmetry. The fraudster gains something of value at the expense of the victim. Under the honest services doctrine, there need not have been that symmetry. Thereafter, courts did not limit the doctrine to fraud by public officials. It was applied to private individuals participating in public decisions and even private employees playing no role in public decisions. In short, the statute applied to any notional breach of fiduciary duty–whatever its boundary or legal source.

In 1987 the Court dealt a death knell to the denial of services fraud doctrine, limited the mail and wire fraud statutes to protection of tangible property rights and challenged Congress to fix the problem if it wished to do so. The result was §1346, enacted the next year, which spelled out that a scheme or artifice to defraud “includes a scheme or artifice to deprive another of the intangible right of honest services.” The prosecutors were off and running dreaming up creative ways to apply the new statute. A criminal statute must clearly define the conduct it proscribes. An unconstitutionally vague statute, the cases say, fails “to provide a person of ordinary intelligence fair notice of what of what is prohibited, or [as being] so standardless that [they] authorize or encourage seriously discriminatory enforcement.” For example, a statute making it criminal to embezzle funds from a bank would be constitutional since everyone knows what it means. On the other hand, a statute making it a crime to do “something wrong” would be unconstitutionally vague. In that case, it would be no answer for the prosecutor to argue that everyone agrees that murder is wrong since the prosecutor would be authorized under such a statute to indict someone for conduct that not everyone agrees is wrong.

Honest services fraud is a titanically vague concept. On its face, it might apply to an employee who called in sick and then went to the ballgame–or even to a judge who used his office to get a first rate corner table in a restaurant for himself and his significant other. The statute, as Scalia put it, “does not answer the question ‘What is the criterion of guilt?’”

It is the duty of courts to uphold rather than invalidate a statute of Congress if they can. This was Ginsburg’s rationale for saving the honest services law by reading in the requirement that the conduct proscribed must be bribery or kickbacks–something that everyone frowns on. But Scalia counters that the Court lacks the power “in order to uphold an enactment to rewrite it.” In his world, judges must resist the “temptation to make all thing right with a stroke of our pen.” Scalia was right; the other six Justices were wrong–but the Supreme Court, as Justice Jackson put it, is “not final because [it is] infallible, but [it is] infallible only because [it is] final.”

James D. Zirin is a New York lawyer and former federal prosecutor. He is host of the cable television program “Digital Age.”